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Why You Should Care About a Growing Alliance Focused on De-dollarization
The United States of America has built a global order following World War II that has benefitted America because every other country on Earth wanted to participate in it. This international order has led to America becoming the sole global superpower. It has enabled the economic success we call the American Dream to be the envy of the world. Unfortunately, this world order that has been beneficial to every American is now unraveling. If we don’t stop this unraveling, it will significantly erode our quality of life.
The G7 and BRICS
Institutions like the Group of 7 (G7), the International Monetary Fund (IMF), and the World Bank are part of this American-led order. The G7 is an informal alliance of industrialized democracies that includes the US, Canada, France, Germany, Italy, Japan, and the UK. It meets annually to discuss topics like global economics, international security, and energy. It was formed in 1975 to address economic concerns such as inflation and a recession triggered by the OPEC oil embargo.
From Gimmick to Institution
The role and influence of U.S.-backed entities like the G7 are being challenged by entities like the BRICS nations — Brazil, Russia, India, China, and South Africa. They are trying to build alternatives to existing international financial systems and political forums and their membership is expanding to countries like Bangladesh, Egypt, and the United Arab Emirates.
In the early 2000’s, the term BRICS was first coined as a marketing gimmick to capture the optimism of investing in some of the world’s fastest-growing economies at the time. Since 2009, the BRICS nations have met annually at formal summits to discuss matters of economics, monetary policy, politics, and security.
They have even created institutions for mutual benefit, like the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA). The NDB funds infrastructure projects in BRICS and other emerging economies, and the CRA provides a safety net to any member country if their national currencies face a crisis.
Calls for One Currency
For more than a decade, China and Russia have been trying to lessen their dependency on the U.S. dollar. This initiative is aimed at safeguarding their economies from U.S. sanctions, minimizing vulnerability to U.S. economic and monetary policy fluctuations, and claiming a stronger position in the global economic hierarchy. This furthers China’s efforts to surpass the U.S. as the global superpower.
Other leaders of BRICS nations have been critical of the role of the United States in the global order. Brazilian President Luiz Inácio Lula da Silva has lamented, “Every night I ask myself why all countries have to base their trade on the dollar.”
To address this sentiment felt by many within the bloc, the BRICS group of nations will discuss the feasibility of introducing a common currency at their August 2023 meeting in South Africa. Some are concerned that such a currency could ultimately lead to a one world currency that upends the international monetary system.
Understanding the Concept of a One World Currency
A one world currency implies a scenario where all nations abandon their national currencies in favor of a single, universal one. This is not a new concept. In the 1940s, British economist John Maynard Keynes famously proposed a single world currency to manage international trade imbalances to simplify and stabilize global finance.
Under a global currency scenario, all nations would use one currency for both domestic and international transactions. It would also necessitate the establishment of a global monetary policy authority. This would eliminate the uncertainties and complexities of exchange rate and currency fluctuations, and could potentially reduce transaction costs, boost global economic growth, and increase economic interdependence.
However, it would also mean the elimination of each national currency and surrendering monetary policy control to a global central bank. Each country would lose its ability to adjust interest rates, control money supply, and utilize currency as a tool to manage its own economy.
The practicality of such a system would require significant advancements in international cooperation, trust, and financial infrastructure. Even more concerning would be the need for countries to give up their national sovereignty. This is a very hard sell, and something the United States government should never pursue. The risk of giving too much power to China and others is too high.
While a one world currency is very unlikely, there are other global financial trends that can affect the American economy and every American’s quality of life.
The Process of De-dollarization and Its Global Impact
Photo: Chinese Bank Notes. The renminbi (RMB) is the official name of China's currency and its principal unit is called the Chinese yuan (CNY). One yuan can be further divided into 10 jiao and 10 fens make 1 jiao.
The BRICS nations, led by China and Russia, have been trying to weaken the role of the U.S. dollar in international transactions—a process known as “de-dollarization.” The U.S. dollar has long been the world’s reserve currency, giving the U.S. significant global economic influence.
De-dollarization could potentially affect global economic stability. As countries shift away from the U.S. dollar, it could cause significant fluctuations in exchange rates and disrupt international trade. For the average person, this could mean changes in the cost of imported goods, shifts in job markets, and fluctuations in interest rates. The inflation of the last two years may pale in comparison to the impact on American families with this kind of volatility.
The U.S. Dollar as a Reserve Currency and Its Impact on the American Economy
The U.S. dollar has long been the world’s dominant reserve currency, with central banks around the world holding large amounts of American dollars in their foreign exchange reserves. The greenback has reigned supreme in international commerce, not just because the United States is the biggest global economy — the majority of commodities worldwide, including oil, is valued and traded in U.S. dollars.
This status provides several benefits to the American economy:
The demand for the U.S. dollar as a reserve currency helps keep its value relatively stable, enabling the United States to borrow money at lower interest rates. This, in turn, allows the government to finance public spending and stimulate economic growth.
The dollar’s reserve currency status boosts the global demand for American goods and services. As countries maintain their reserves in U.S. dollars, they are more inclined to import from the United States, benefiting American businesses and the overall economy.
If the dollar were to lose its status as the world’s reserve currency, several negative consequences could follow:
Decreased demand for the dollar: With reduced demand for U.S. dollars, the currency’s value would likely decline, leading to higher import prices and potentially contributing to inflation.
Higher borrowing costs: The United States would no longer enjoy the advantage of low borrowing costs, resulting in increased interest rates on government debt and making it more expensive to finance public spending.
Reduced global influence: Losing the reserve currency status could diminish the United States’ influence in international financial markets and global trade.
To be clear, the U.S. dollar remains the dominant currency in global foreign exchange reserves, but its share has dropped from more than 70% in 1999 to the high 50s now, based on data from the International Monetary Fund.
BRICS Nations and Their Steps Toward De-dollarization
China has been promoting the use of its currency the yuan in international trade and investment. Other countries – from Brazil to Southeast Asian nations – have been calling for trade to be carried out in other currencies besides the U.S. dollar.
Based on International Monetary Fund data from 2022, CNBC has found that mainland China was the largest trading partner to 61 countries when combining both imports and exports. When doing the same calculation, the U.S. was the largest trading partner to 30 countries.
Other countries, such as Russia and Iran, have been exploring alternative payment systems that would allow them to bypass the U.S. influenced international monetary system and avoid economic sanctions. For example, in 2017, Russia launched a new payment system called Mir, which allows for transactions in Russian rubles and is intended to reduce Russia’s dependence on the U.S. dollar.
The Impact of Digital Currencies on the One World Currency Debate
The rise of digital currencies, notably cryptocurrencies and central bank digital currencies (CBDCs), has complicated the debate over a global currency.
Cryptocurrencies, such as Bitcoin and Ethereum, are digital assets that operate on decentralized networks and offer increased transparency and security. However, they are highly volatile and lack regulation, which could pose a threat to the stability of the global financial system if adopted as a single world currency.
China is at the forefront of this digital currency revolution with its Digital Currency Electronic Payment (DCEP) project. While this is not a one-world currency now, it does represent a significant shift in the way nations approach money and could influence future discussions about a global currency.
China’s CBDC and the Pursuit of a One World Currency
China’s DCEP project is their version of a Central Bank Digital Currency (CBDC). A CBDC is a type of digital currency issued and regulated by a country’s central bank. Unlike cryptocurrencies like Bitcoin, which are decentralized and operate on a blockchain network without any central authority, a CBDC is centralized and is equivalent in value to the country’s traditional fiat currency.
The development of this CBDC, referred to as an e-yuan (e-CNY), has raised questions about China’s ambitions in the global financial system. The Chinese government’s push for the internationalization of the yuan through its CBDC should be interpreted as an attempt to challenge the dominance of the U.S. dollar.
The primary idea behind a CBDC is to provide a digital form of a nation’s fiat currency, which is legally accepted throughout the country. It represents a claim against the central bank of the country, just like cash, and is often proposed to function alongside traditional forms of money.
As time progresses, it’s not a difficult thought experiment to conclude that the e-CNY will become the default protocol for all retail and personal financial transactions. It will replace China’s leading mobile payment platforms like Alipay and WeChat, which are comparable to U.S. services such as Apple Pay, Google Pay, Venmo, and PayPal.
This would enable the Chinese government to trace virtually all monetary transactions, freeze accounts, and even modify balances. As explained in a report from the Hoover Institution, the e-CNY could potentially become a significant tool for penalizing Chinese citizens for their social or political activism or criticism of the government.
The adoption of the e-CNY as a one world currency would require global consensus, which is unlikely to be achieved easily, given the diverse economic interests of countries worldwide. Additionally, the United States’ economic influence and the dollar’s current status as the world’s reserve currency make it difficult for any single currency to displace it in the near future.
However, the advent of digital currencies and the trend towards de-dollarization suggest that changes are afoot in the global monetary system.
Bottom Line – It’s the Thought that Matters.
While the idea of a one world currency is far-fetched, attempts by economic blocs like the BRICS to de-dollarize or lessen their dependency on the U.S. dollar pose significant challenges to U.S. foreign policy, impact the U.S. dollar’s status as a reserve currency, and erode national monetary policy options.
The concerted efforts of nations to reduce their reliance and interdependence on the United States underscores a shift in global economic dynamics and a resistance to U.S. financial hegemony. These efforts towards de-dollarization, irrespective of their success or failure, necessitate a recalibration of U.S. foreign policy to ensure continued global engagement and influence.
The fact that countries are even thinking of de-dollarization is a problem and a sign of more problems to come. It is a sign that American cultural, military, and economic influence around the world is less desirable or even something to be feared.
In the words of former Federal Reserve Board member Kevin Warsh, “The dollar’s persistent, outsized role in global markets is also a function of network effects: The more people use the dollar, the more valuable it becomes. And the harder it is to dislodge.” The opposite of this is true too: the less people use the dollar, the less valuable it becomes and the easier it is to dislodge.
To strengthen our economic position and preserve the United States’ ability to prosper in the global financial system we have built over the last 80 years, we need more people wanting to use the dollar because it makes too much sense for them not to.
